WASHINGTON, April 18 (UPI) -- The worst could be over for the global economy, thanks largely to the rebound in U.S. growth prospects, the International Monetary Fund said Thursday in its latest report.
In its semi-annual World Economic Outlook survey, the IMF reported that global gross domestic product growth would reach 2.8 percent in 2002, and expand to 4.0 percent the following year. Meanwhile, the IMF anticipates growth among European Union members at 1.5 percent this year, rising to 2.9 percent in 2003. But the agency expects Japan's economy to shrink by 1.0 percent this year, and expanding only by 0.8 percent the following year.
"We are more confident about global recovery in 2002 than we were in December," IMF Research Director Kenneth Rogoff said. He pointed out that U.S. growth potential has picked up significantly, and may well exceed the 2.3 percent it projects for 2003. The international agency anticipates U.S. GDP reaching 3.4 percent the following year.
The IMF is kicking off its spring meetings Saturday, which will be attended by finance ministers and central bank governors from the agency's 183 member countries.
The group last met in Ottawa last November, when financial leaders were particularly concerned about the aftermath of the terrorist attacks amid a U.S. recession. Certainly, prospects look brighter for the world, both in developing and industrialized countries, as the United States appears at first blush to have shrugged off one of its mildest recessions in recent history.
Still, one of the biggest threats that could upset the potential global recovery is also the United States, namely its current account deficit. The U.S. deficit currently accounts for 4 percent of the country's GDP, and Rogoff pointed out that such a high level of deficit would be unsustainable.
"Historically, a current account deficit of 4 to 5 percent will eventually be reversed, and hurt foreign exchange," Rogoff said. He pointed out that a sharp reversal would cause the dollar's value to depreciate significantly, which in turn would create instability in the global financial markets.
The chief economist, however, also added that the current account deficit was more of a medium-term issue, rather than an immediate problem, and stated that a double-dip recession in the United States was "highly unlikely."
Rather, the more pressing issue was the continued economic downturn in Japan, according to the IMF.
Questioned whether Japan can once again become an engine driving the global economy, Rogoff said that was "clearly not the case" for the next two years, pointing out that the country's deflationary spiral was particularly detrimental to Japan's growth prospects.
He added that the priority must first and foremost be to get the Japanese economy back on track, and to that effect, a continued depreciation of the yen should be welcomed even if that meant upsetting other countries, particularly in East Asia.
"The risks are greater if there is a sustained downturn (in the Japanese economy) than there is from a yen depreciation," Rogoff said.
A weaker yen makes Japanese exports cheaper and thus more competitive overseas. As a result, a large number of Japan's export-oriented companies have benefited from the yen's recent decline against both the U.S. dollar and the euro, which in turn has boosted Japan's economic prospects in the near-term. Indeed, the Japanese government has stated that the economy has picked up moderately in recent weeks as exports have increased, particularly to the United States.
The yen's decline and subsequent rise in Japanese export has, however, upset Japan's neighboring countries, particularly South Korea and China, which often directly compete with Japanese goods in overseas markets.
Another factor that could weigh down the global economy is rising oil prices. The IMF pegs oil prices to be around $23 per barrel this year, and dip to $22 a barrel in 2003. It added that every $5 oil prices increase shave 0.25 percent from the world's GDP. The agency cautioned that given the political situation in the Middle East, oil prices as well as future potential terrorist attacks will remain wild cards in driving the world economy.
